How do I compare short-term borrowing costs across alternatives?

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AcadiFi · Accepted Answer

Every short-term funding source has a stated rate plus fees and conditions that change the effective cost. The discipline is to compute the all-in annualized cost and apply it consistently. Bank revolver: stated rate is typically SOFR plus spread. Add commitment fees on unused capacity (often 25-50 bps), facility fees, and covenant monitoring costs. Compute effective rate as (interest + fees) / average utilized balance. Commercial paper: the stated yield is a discount rate on face value. Bond-equivalent yield formula: BEY = (Face - Price) / Price * 365 / Days. Add dealer fees (typically 5-10 bps) and backup facility fees (since rating agencies require 100% committed backstops). Factoring: the advance rate is typically 80-90% of receivable face. Factor charges discount (1-3% of face) plus service fee (0.5-2%). Annualized cost = (total fees / amount advanced) * (365 / average collection period). This is often 15-30% annualized, expensive compared to bank debt, but provides advance that a bank might not extend. Trade credit: the terms 2/10 net 30 offer 2% discount for paying within 10 days instead of 30. Skipping the discount equals paying 2% for 20 days of financing, which annualizes to (2/98) * (365/20) = 37.2%. This is often the most expensive source. ```mermaid flowchart LR A[Funding
source] --> B[Stated
rate] A --> C[Fees &
conditions] B --> D[All-in
annualized
cost] C --> D ``` Imagine Octavia Ferreira at Brightmoor Services choosing between a 6% revolver (with 25bps commitment fee on unused), 5.2% commercial paper (plus 8bps dealer fee), and declining 2/10 net 30 discounts. The revolver runs about 6.15%, CP about 5.3%, and foregone discounts about 37%. CP is cheapest for stable needs, revolver for flexibility, and discount capture should be prioritized over any other financing.

How do I compare short-term borrowing costs across alternatives?

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